Investors must be “accredited” investors. Accredited investors are defined as such by the U.S. Securities and Exchange Commission (SEC) pursuant to 15 USC section 77b(15)(ii). Additionally, investors can’t be principal owners of the business or involved with the business in a full-time professional capacity. Investments can be made by “pass-through” entities, such as a partnership, rather than a specific individual or corporation. However, they can’t be venture capital funds, hedge funds, or commodity index funds with institutional investors. The investor must be making a monetary investment that is at-risk and is not secured or guaranteed.
Companies must have 20 or fewer full-time employees at the time of investment and less than $500,000 of revenue in the year prior to the investment. The principal place of business must be in Massachusetts and at least half of the employees must be based there. The business must have a written business-plan, forecasts, and other financial information. The investment must be used for capital improvements, plant equipment, R&D, or working capital. The investment can’t be used to pay dividends, fund or repay shareholder loans, redeem shares, repay debts, pay wages, or be put towards other benefits of the taxpayer investor. The business can’t be involved in retail, real estate, professional services, gaming, or financial services.
Taxpayers may be eligible for a credit on 20% of the qualifying investment amount. Additionally, taxpayers investing in companies located in a “gateway municipality” may qualify for a higher, 30% credit. Gateway municipalities include the following Massachusetts towns: Attleboro, Barnstable, Brockton, Chelsea, Chicopee, Everett, Fall River, Fitchburg, Haverhill, Holyoke, Lawrence, Leominster, Lowell, Lynn, Malden, Methuen, New Bedford, Peabody, Pittsfield, Quincy, Revere, Salem, Springfield, Taunton, Westfield and Worcester.
A specific taxpayer’s credit is capped on investments up to $125,000 per business per year and $250,000 of cumulative investment, per business. The annual credit on all investments is capped at $50,000 per investor.
The program is limited to $500,000 in tax credits for the 2020 tax year and interested investors have to apply. There is a two-step online application being administered by the Massachusetts Life Sciences Center. The application requires information from both the investor and the qualifying business. There are also annual reports that must be submitted to ensure compliance. Applications are currently live online here . The credit is monetized on the investor’s tax return with the Commonwealth of Massachusetts. The credit can be claimed in the initial year of investment and if not fully monetized, can be carried forward to the subsequent 3 tax years. If the business no longer has their principal place of business in the Commonwealth during the subsequent 3 years, the credit must be forfeited or repaid.